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Press Release

    So-Called Stranded Costs Shouldn’t Short-Circuit Electricity Deregulation

    05/20/1999

    (WASHINGTON) – Today, Wayne Brough, Ph.D., Chief Economist at Citizens for a Sound Economy (CSE) Foundation, and Michael T. Maloney, Ph.D., Professor of Economics at Clemson University, released a new study on electricity deregulation.

    In "Promise for the Future, Penalties from the Past: The Nature and Causes of Stranded Costs in the Electric Industry," Maloney and Brough present the case that so-called stranded costs are not a result of efforts to restructure the industry. Instead, technological innovation, as in many industries, has made equipment and generation methods obsolete.

    The study makes clear that neither economic theory nor legal precedent provide a case for indemnifying past investments in obsolete equipment. "Technological progress is the driving force of the prosperity that the United States has enjoyed since its founding, and public policy has consistently taken the view that technological progress should not be suppressed," note the authors. Other industries, such as telecommunications, have made dramatic transformations that made past investments obsolete. Notably, no stranded costs were recovered in these transformations and private investment in such industries continued, despite the potential risks. Therefore, stranded costs should not ‘short-circuit’ electricity deregulation.

    The authors assert that the technology-driven decline in the costs of electricity generation must be addressed by regulators whether the industry is competitively restructured or not. However, Dr. Brough stated, "We believe competition is the best way to ensure that the benefits of new innovation are passed on to consumers."

    Promise for the Future, Penalties from the Past:
    The Nature and Causes of Stranded Costs in the Electric Industry
    (PDF format, 55 pp. 277 Kb)